VZCZCXRO1717
OO RUEHIK
DE RUEHTA #1774/01 2781012
ZNR UUUUU ZZH
O 051012Z OCT 09
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 6524
INFO RUCNCIS/CIS COLLECTIVE 2010
RUCNCLS/ALL SOUTH AND CENTRAL ASIA COLLECTIVE
RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUCNIRA/IRAN COLLECTIVE
RUEHBJ/AMEMBASSY BEIJING 1379
RUEHKO/AMEMBASSY TOKYO 2078
RUEHUL/AMEMBASSY SEOUL 1025
RHMFISS/DEPT OF ENERGY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEAIIA/CIA WASHDC
RHEFAAA/DIA WASHDC
RHEHNSC/NSC WASHDC 1566
RUEKJCS/SECDEF WASHDC 1442
RUEKJCS/JOINT STAFF WASHDC
RHMFIUU/CDR USCENTCOM MACDILL AFB FL
RUEHAST/USOFFICE ALMATY 1915

UNCLAS SECTION 01 OF 02 ASTANA 001774 
 
SENSITIVE 
SIPDIS 
 
STATE FOR SCA/CEN, EEB/ESC 
STATE PLEASE PASS TO USTDA 
 
E.O. 12958: N/A 
TAGS: PGOV PREL ECON EPET EINV AZ KZ
SUBJECT:  KAZAKHSTAN AND AZERBAIJAN SIGN ENERGY AGREEMENTS 
 
REF:  (A) ASTANA 1539 
      (B) ASTANA 1400 
 
ASTANA 00001774  001.3 OF 002 
 
 
¶1.  (U) Sensitive but unclassified.  Not for public Internet. 
 
¶2.  (SBU) SUMMARY:  On October 2, during President Nazarbayev's 
visit to Baku, the national oil companies of Kazakhstan and 
Azerbaijan signed three documents on energy cooperation.  The 
agreements do not preclude the participation of international oil 
companies (IOCs), but they signal that SOCAR and KMG are prepared to 
move forward with oil transportation projects, even without IOC 
shipping commitments.  END SUMMARY. 
 
KMG AND SOCAR SIGN OIL TRANSPORTATION AGREEMENTS 
 
¶3.  (SBU) On October 2, the State Oil Company of Azerbaijan (SOCAR) 
and Kazakhstan's national oil company KazMunaiGas (KMG) agreed to 
use Azerbaijani infrastructure to transport Kazakhstani oil, to 
conduct a joint feasibility study of the marine portion of the 
Kazakhstan Caspian Transportation System (KCTS), and to explore 
alternative options to move Kazakhstani oil from Baku to Black Sea 
ports, including the Georgian ports of Kulevy and Batumi.  The 
agreements come less than three weeks after President Nazarbayev 
hosted a summit in Aktau for the presidents of Russia, Azerbaijan, 
and Turkmenistan (reftel A). 
 
¶4.  (SBU) KCTS will require a new, 500-kilometer pipeline from 
Eskene to Kuryk, new oil-loading terminals on the Kazakhstani coast 
of the Caspian Sea, large tankers and support vessels, new 
oil-unloading terminals on the Azerbaijani coast of the Caspian Sea, 
and new pipelines to the Baku-Tbilisi-Ceyhan system.  Initially, the 
system is expected to transport 500,000 barrels of oil a day (23 
million tons a year) with expansion to 750,000-1,200,000 barrels a 
day (35-56 million tons a year).  Negotiations between KMG and the 
IOCs have stalled over ownership and operational issues related to 
the Eskene-Kuryk pipeline (reftel B). 
 
A NEW BLACK SEA PIPELINE? 
 
¶5.  (SBU) The memorandum of intent to cooperate on Baku-Black Sea 
oil transportation mentions the possibility of constructing, on a 
parity basis, a new pipeline from the Caspian coast near Baku to the 
Black Sea coast, in order to transport Kazakhstani oil through 
Azerbaijan.  Kazakhstani officials have long advocated for access to 
the Baku-Supsa pipeline, without success. 
 
¶6.  (U) On October 2, Azerbaijani President Ilham Aliyev told 
reporters that Azerbaijan and Kazakhstan "maintain an active 
dialogue on a wide range of issues.  Our two countries are 
implementing a number of projects together," he said, "and we have 
high hopes for their success."  President Nazarbayev said that 
"there are no unresolved problems, differences or friction in 
relations between Kazakhstan and Azerbaijan." 
 
IOCS SHOULD NOT BE CONCERNED . . . 
 
¶7.  (SBU) Dan Mihalik, an American citizen with more than 12 years 
of experience in Kazakhstan's oil and gas industry, is currently an 
advisor to Italy's Agip and a member of the Board of Directors of 
KazTransOil.  On October 4, Mihalik told Energy Officer that, as a 
Board Member of KTO, he was very happy that SOCAR and KMG agreed to 
conduct the KCTS feasibility study independently.  "This is fully 
consistent with the strategy that Kazakhstan has been pursuing for 
the last 12 years, and from their perspective, it is absolutely the 
right thing to do."  Mihalik said the joint agreement is good for 
the diversification of Kazakhstan's oil transportation routes, and 
does not doubt KMG and SOCAR's technical expertise to carry out the 
work.  When asked about the implications of the agreement for IOC 
participation in the KCTS project, Mihalik was unconcerned, "This 
should not be a major issue for them.  They don't want to be in the 
marine transportation business.  They don't want to own the 
 
ASTANA 00001774  002.3 OF 002 
 
 
terminals and the tankers."  Mihalik said that the next major step 
will be to secure shipping commitments from the IOCs, but he 
asserted that recent agreements between SOCAR and KMG would 
adversely affect the IOC's negotiating position. 
 
BUT SOME ARE SKEPTICAL 
 
¶8.  (SBU) On October 5, Jay Johnson, Managing Director for Chevron's 
Eurasia Business Unit, told Energy Officer that KMG's agreement to 
conduct a joint feasibility study with SOCAR is part of KMG 
President Kairgeldy Kabyldin's "drive to develop an entirely 
government-owned transportation corridor" across the Caspian.  He 
said Kabyldin is not under any time pressure to build KCTS, whereas 
the IOCs are eager to plan an evacuation route for anticipated 
Kashagan volumes.  Johnson said KMG and SOCAR have neither the 
capital nor the expertise to build the system without IOC 
participation.  He said the amended Kashagan contract includes 
ship-or-pay commitments, but since Chevron is not part of the 
Kashagan consortium, he did not know whether or not these 
commitments could be invoked to construct KCTS, or whether the funds 
would be sufficient to cover the cost of building the system. 
Johnson said he would not be surprised if the agreements between KMG 
and SOCAR were part of a ploy to cut out U.S. producers and ship 
Kashagan oil to Iran.  He said that Iran offers the most attractive 
alternative from a strictly commercial point of view, and only Iran 
has the large tankers and ship-building capacity to transport the 
large volumes of crude necessary to make KCTS commercially viable. 
 
¶9.  (SBU) COMMENT:  Since his speech on Caspian issues at the 
Russian port of Astrakhan on August 17, Russian President Dmitri 
Medvedev has lobbied for increased energy cooperation with the 
leaders of other Caspian states in Orenburg (September 10), Aktau 
(September 12), and Turkmenbashi (September 13).  Yet, despite 
Medvedev's clear attempt to set the agenda for other Caspian states, 
Nazarbayev and Aliyev demonstrated on October 2 that the presidents 
of the region can and will act independently, even on projects that 
Russia likely opposes.  Although representatives of the national oil 
companies of Azerbaijan and Kazakhstan signed the agreements, 
Nazarbayev and Aliyev's personal involvement advanced the process. 
We expect the IOCs to advise and consult SOCAR and KMG on the 
feasibility study.  They must also provide ship-or-pay volume 
commitments, or direct financing, before the system can be built. 
We therefore view the October 2 agreements as a good sign for KCTS. 
Presidential support is advantageous for the project and for the 
IOCs, because ultimately only the presidents of Kazakhstan and 
Azerbaijan can make the final decisions needed to complete the 
project. 
 
HOAGLAND